| Remarks by Claude Lamoureux, President and CEO, Ontario Teachers' Pension Plan Board, to the Senate Committee on Banking Trade and Commerce, May 7, 1998 |  |
The presence of large pension funds in the public capital markets has raised questions about to whom these funds are accountable and the extent of their economic influence.
The Standing Senate Committee on Banking, Trade and Commerce is providing a useful forum to examine these and other questions related to institutional investing.
The Ontario Teachers' Pension Plan is pleased to add its voice to the discussion and to have this opportunity to present information we believe will help to allay many of the concerns expressed about institutional investors.
I will touch on three areas that I cover in the brief. These are:
- the influence of institutional investors;
- how the Teachers' pension plan is governed and;
- public opinion about large pension plans.
Pension funds and mutual funds manage investments on behalf of millions of working Canadians looking for future financial security.
In the process, they have become substantial investors in Canadian corporations. In 1975, for example, pension and mutual funds had $5.3 billion invested in Canadian equities. Today, that figure is more than $180 billion.
This growth reflects two significant developments. One is our aging population. In the popular book, Boom, Bust & Echo, David Foot argues that as more and more baby boomers grow over 40, their financial priorities change from debt management to asset management.
This, at least in part, helps to explain the dramatic growth in the number and assets of mutual funds.
The other development is the shift of pension fund assets from fixed income securities into stocks. Pension and mutual funds own nearly one-third of the shares in Canada's publicly traded corporations--a dramatic change from two decades ago when institutional holdings were less than one percent.
For our part, the Teachers' pension plan has more than $18 billion invested in Canadian stocks compared with nothing in 1990.
So, how does a plan like Teachers' exercise influence on the Canadian market?
As you know Mr. Chairman, we buy stocks in two ways.
- We buy a basket of stocks that mimics the market index; and
- We select individual stocks we think are undervalued.
About 85 percent of our equity investments are made by mimicking the market index.
The Toronto Stock Exchange 300 Index contains shares of Canada's 300 major public corporations. We invest proportionally in every stock listed on the Toronto Stock Exchange 300 index to match its weighted capitalization in the index. So, if a stock is in the TSE 300, we buy it.
The Teachers' pension plan owns about three percent of the 300 largest companies listed on the Toronto Stock Exchange. Consequently, we are one voice (albeit, a significant voice) among many investors.
In keeping with our fiduciary obligations, and like other shareholders, we exercise our proxy voting rights to ensure corporate initiatives are in the interest of shareholders.
We review all proxies as they come in and check them against our guidelines as presented in our Statement of Guidelines and Procedures on Proxy Voting, of copy is included with our brief.
In situations where we have exerted quiet influence, we act mainly through the corporate board of directors to improve shareholder value over the long term. This is to the benefit of all shareholders, especially the small investor.
How is our plan governed? Based on our experience, successful pension plans, possess three essential components. These are:
- Competent board--one made up of individuals who have the experience and expertise to oversee a pension plan;
- Clear purpose--namely, to pay the pensions' promised;
- Good corporate governance--which means, among other things, an independent board of directors.
With regard to plan governance, the Teachers' pension plan intends to follow the best current practices. These include:
- Board of directors that is independent of management and must act in the best interest of all beneficiaries;
- Management compensation that is tied to the financial performance of the fund; and
- Executive leadership that is open and communicative.
The standards we operate under are also those advocated for the industry by the Pension Investment Association of Canada (PIAC) in its model for pension plan governance. We helped to develop these standards and encourage pension plans to implement them where they apply.
We also follow the recommendations of the Dey Committee report, where they are applicable, on corporate governance of public corporations.
And finally, in polls and focus groups, plan members have shown confidence in how we are managing the retirement income of Ontario teachers and their survivors.
This is consistent with Canadian attitudes about large pension funds. A national poll conducted late last year on Canadian attitudes toward large pension funds found that:
- Over half of Canadians feel pension funds are doing either a very good job (7%) or a good job (46%) securing a stable source of retirement income for their members;
- Two-thirds (65%) of Canadians feel the government should have no involvement in determining how independent pension plans can invest members' assets;
- Only 15% of those surveyed think large pension funds have too much influence on the Canadian economy;
- 66% believe pension plans invest responsibly.
Mr. Chairman, that concludes my remarks. I will be glad to answer the questions of this committee.